Assets that may be of concern to your lender include outdated technologies. If your business is a manufacturing company, the lender will find that outdated equipment hurts competitiveness.
If you are an investor in a partnership with liability for future capital calls, the lender will discount your income or cash flow projections. The interests of the associations are notoriously illiquid. Plan for your lender’s discount on the NAV estimates.
Ask for enough money the first time. Don’t put yourself in the situation of having to come back for more money. For example, if you have potential exposure for a $ 200,000 equity call from an investment, don’t apply for a $ 100,000 line of credit because you don’t think the partnership might need more.
If all other things are acceptable (cash flow, stability, assets) and you have an exposure of $ 200,000, ask for $ 200,000. The lender will feel more comfortable knowing that you will have enough money to cover potential liabilities and will not have to approve another loan to protect the first one.
If you own shares in a closed company, it is virtually impossible to trade. The cards or “144 shares” cannot be easily sold. It won’t do your lender any good to have sixteen something for a bad loan that cannot be used to reduce your debt. Expect a discounted value.
Personal business valuation is a very tricky area. While your valuation may be perfectly legitimate for a going concern, it does not reflect what could be gained if you no longer run the business or if you sold it at a high price.
If something were to develop that damaged your business so that it could no longer generate enough cash flow to pay off the loan, then it would no longer be as valuable! About the only thing a lender could then sell would be actual tangible assets, which would be used and depreciated.
While not a problem, certain prepaid assets have little collateral value to a lender because they would not be worth much in liquidation. For example, if you prepay your rent or insurance premiums to get a discount, that’s an asset to your business. However, the lender is interested only because it affects your cash flow, not as collateral. Deposits you have paid for things like equipment rental, rent, or utilities are also of negligible value.
Troubled personal assets
In a personal loan application, there will be a line to estimate the value of your household items. While your furniture may seem valuable to you for many reasons, a lender will value it at approximately 10 cents on the dollar of the purchase price.
Attach a note to your financial statements that the artworks or other collectibles are listed at their retail value. If you have current appraisals, include them. If not, look at how you got to the value (for example, you questioned the local art gallery).
The lender will count the artwork and collectibles at wholesale value, or approximately 50 cents on the dollar. That is why a lender could sell it quickly.
1 Assets that present problems of liquidation to your lender will be drastically discounted by the lender.
2 Farm properties, partnerships, non-income real estate, and closed company stocks are prime examples of troubled assets.